Embarrassment or punishment. These are the only things that will stop people – and corporations – trying to illegally evade taxes or engage in aggressive methods to legally lower their tax bill.
The latest revelations about HSBC in Switzerland show just how pervasive tax evasion has been. There is no point appealing to people’s better instincts or expecting them to pay up if there is no penalty for not doing so. Nor is there any mileage in hoping that big corporations will be socially responsible and “do the right thing”. Tight rules and fear of the consequences of not paying are the only things that will work.
If that strikes you as a bleak view of human nature, then so be it. But having seen so many illegal and barely legal tax manoeuvring over the years, it is the only conclusion I can come to.
To say tax evasion was rampant in this country in the 1980s and 1990s would be an understatement. Little did we know when this newspaper first exposed the Cayman Islands’ link to former taoiseach Charles Haughey’s money in 1996 that it would lead to the uncovering of the Ansbacher accounts by the McCracken tribunal.
Dirt inquiry
Three years later the Oireachtas Dirt inquiry came up with fascinating details on what everyone already knew, but nobody admitted: that when financial institutions assured you in their advertising that everything would be “confidential”, they meant they wouldn’t tell the taxman.
The Dirt accounts were a kind of middle-class Ansbacher. By the time it all came out, a lot of the Ansbacher and Dirt evaders had already settled their accounts via the 1988 or 1993 tax amnesties.
The legal tax scams – sorry, schemes, – were even more inventive. Many focused on a string of property-related tax incentives introduced from the late 1980s on. These created openings for accountants to develop what were effectively low-risk tax shelters for rich people. This reached its nadir when, on one occasion, syndicates of exactly 16 people were formed to buy individual floors of an IFSC building, because this was the only way to avail of the tax break.
Legal tax avoidance
Over the years many of these allowances were gradually – too gradually – closed off. Changing the rules does have an impact and the scope for legal tax avoidance is now lower, even if many still achieve it, often via offshore arrangements or routing their business income through corporate structures. Illegal tax evasion is, I suspect, less prevalent than 15 or 20 years ago, though still probably a huge cost to the exchequer.
Ireland is in no way unusual. The “Swiss Leaks” revelations – based on the work of the International Consortium of Investigative Journalists (ICIJ), of which this newspaper is the Irish partner – show how the Swiss arm of HSBC hid some $100 billion in accounts for 100,000 people in 200 countries.
The reaction to this shows one of the ways forward. Banks, big companies and even some wealthy individuals will now realise that tax-dodging manoeuvres – legal or illegal – will not necessarily remain secret and can damage their reputations. They will realise that this can have long-term implications for their business. Where stands the HSBC “brand” after last week?
The big companies who use legal mechanisms to shuffle money around the world and minimise their tax bills also face threats to their reputations, with potential implications for their long-term success. The string of media reports, Senate hearings and international discussion about US multinationals paying tiny amounts of tax on earnings outside the US suggests this is no longer politically sustainable. President Barack Obama’s proposal of a mandatory tax on corporate money held offshore may not fly, but it reflects a changing political and public mood in the US and internationally.
Still, you wonder how quickly change will come. Forget the window-dressing of Ireland getting rid of the “double Irish”; the tax authorities in the US and the other OECD countries could work out in a few months how to get the big players to pay more tax. How fast do countries really want to move in a game where everyone is trying to hold on to investment and jobs? And how much more tax is enough?
Prosecutions
The same snail’s pace is evident in international moves to share information on money held in bank accounts to combat personal tax evasion. Things are changing here, too, and old-style tax havens such as Switzerland realise it. But progress is slow and the next phase of co-operation on sharing information is not until 2017.
The other issue is punishment for serious and illegal tax evasion. The number of criminal prosecutions and convictions for tax evasion here is increasing, though from a low base. This reflects legislative change but also less tolerance for tax evading, which is no longer seen as a “victimless” way to hold on to a few bob. But there is still a murky world between tax evasion and tax avoidance where the rules seem to dictate that paying what you owe and perhaps a bit more is the worst penalty you will face.
Nobody likes paying tax. Everyone can find a reason why it shouldn’t apply to them. There is no use telling taxpayers about the implicit social contract which involves taxes being used to provide public services. The temptation to take a “free ride” on everyone else’s taxes is just too much. The only way forward is to keep making it more difficult to legally avoid tax and keep turning up the heat on those who don’t pay. Twitter: @CliffTaylorIT